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Strategy

Hera’s strategic objective has always been the creation of value from a multi-stakeholder perspective, in the medium and long-term, competing autonomously and effectively in liberalised markets. The objective is to replicate the “unique” business model for expanding the Group and managing primary services in an increasingly efficient manner in order to satisfy the main stakeholders.

Hera formulated a strategy based on its strong points, in other words an “open” organisational model, capable of allowing an efficient increase in size through external lines, national leadership in the waste sector and a loyal, extensive customer base concentrated in the reference area.

Maintaining the customer base has become a “strategic imperative” for the Group, pursued through quality of service, after-sales service and an integrated offering including a complete range of primary services, always deemed to be the competitive tools to achieve this aim. The multi-business portfolio (with traditional gas, water, waste and electricity services) was seen as key in protecting the customer base, capable of allowing the Group the time needed to improve the quality and competitiveness of its services and achieve more sustainable dimensions. The development strategy was also directed at maintaining a balance between the various activities of providing all the services to the customer base and guaranteeing a low variability profile of the multi-utility portfolio results.

Hera’s strategic plan was made up of five priorities, which guided the Group’s management on a continuous and linear path throughout the first ten-year period:

Pursuing a process of extracting synergies from corporate mergers, through the complete integration of the businesses that are incorporated into Hera

Implementing the plan for constructing large plants and developing networks, balancing the growth of all businesses to increase the efficiency and quality of services

Preserving a sound, low-risk economic-financial profile, capable of satisfying stakeholders through a sustainable approach in the medium to long-term

Pursuing merger and acquisition opportunities in the liberalised sectors (waste treatment, energy sales and generation), both to consolidate the leadership position in the waste management sector and to expand, from a defensive perspective, the range of services to customers with electricity services in line with the development guidelines pursued by large international groups. The acquisition of the assets needed to achieve the goal has supported growth in the electricity business, only present at the birth of the Group in an embryonic stage

Rolling out the innovative Hera aggregation model in multi-utility businesses in neighbouring areas with a territorial continuity logic, focused on compatible activities and with economic-financial profiles capable of guaranteeing the financial soundness of the Group.

To ensure greater efficiency and exploit economies of scale, the mergers were integrated in the original model based on a business holding company. At the same time, “direct operational supervision” of all local territories was guaranteed to preserve the crucial competitive advantages of proximity to customers and local roots.

The strategy of focusing on core activities has led to the portfolio being rationalised, with the sale of smaller businesses and the rationalisation of the shareholder structure. This has guaranteed a leaner organisation chart which is in line with the new Group management strategies.

In the field of energy activity, the development strategies were always aimed at consolidating the important position in core sectors (distribution and sale of gas) in the reference territory, both through improvement of networks and quality of service and through improvement of after-sales service. The dual fuel strategy, the expansion of the electricity services offered to existing customers, was supported by a parallel and prudent upstream strategy of self generation development complementing the market procurement sources. All of this made it possible to maintain a low risk-exposure profile in an area in which the Group did not have obvious capabilities.

In the waste disposal market, in which Hera is the market leader in Italy, the strategy is aimed at strengthening the plant structure for sustainable management with regard to the environment. In a market featuring a seriously underdeveloped infrastructure, the Group’s goal was to develop a fully-integrated plant system, capable of reusing waste materials and extracting energy from waste, through an ambitious investment policy and the improvement of efficiency and rationalisation of operating activities.

In regulated businesses Hera adopted a strategy to improve efficiency and plant development through infrastructures in the reference territories, strengthening positions in local markets and consolidating strong points with a view to gaining contracts when they expired and were put out to tender.

The Acegas Aps aggregation project

Acegas Aps is a multi-utility company, with a portfolio focused on balanced assets similar to Hera, which operates in some of the richest regions in Italy (Veneto and Friuli) in terms of a GDP per capita, with a population of more than 6 million people and a high concentration of businesses similar to those in the original Hera reference territories.

The growth strategies pursued by Hera match perfectly with those of Acegas Aps in terms of their business/strategic profile and the aggregation of the two entities will allow an important consolidation of market positions in all businesses, expanding development potential still further in these areas.

The project involves aggregation methods which are faithful to “Hera’s original and unique model”, based on expertise which has been developed and thereby reducing the risks involved therein. The governance of Acegas Aps and the stability of the diversified shareholder structure are also in keeping with the Group’s past.

The “new” Hera, which will result from the integration with Acegas Aps, will have a value of production of over €4.5 billion and EBITDA of €750 million, based on 2011 figures. These figures put the Group in second place in the national multi-utility rankings and in thirtieth place for market capitalisation on the Milan Stock Exchange.

The integration project will take place in two stages. The first, scheduled to happen by the end of the year, involves the merger of Hera and the holding company (Acegas Aps Holding S.r.l.) made up of the joint Acegas Aps majority shareholders, who own 62.7% of the Acegas Aps S.p.A. listed shares. The second stage, which will take place in the first part of 2013, involves the launch of a public cash and stock tender offering (pursuant to Article 106, paragraphs 1 and 2-bis of the TUF – Consolidated Finance Act) for the remaining part of the Acegas Aps listed shares, in order to “delist it” from the stock market.

The framework agreement involves the exchange ratio for the merger of Acegas Aps Holding into Hera as approximately 0.763 new Hera shares for a nominal €1.00 of Acegas Aps Holding share capital (equal to €188 million).

Based on the above-mentioned exchange rate, the Municipality of Trieste and the Municipality of Padua, the only shareholders of Acegas Aps Holding, will be given a total of approximately 143.38 million Hera shares.

Acegas Aps Holding shareholders will also receive a cash payment of €3.4 million.

The cash and stock tender offering will be promoted by Hera following the completion of the merger. Acegas Aps minority shareholders will receive the same exchange ratio as set out under the scope of the merger, in other words approximately 4.16 new issue Hera shares for every Acegas Aps share, in addition to a cash component of approximately €0.27 per Acegas Aps share. This cash component will involve a cash payment, if the cash and stock tender offering is fully subscribed, of a maximum of €5.6 million, which reflects the cash payment made to Acegas Aps Holding shareholders during the merger and the net financial debt of Acegas Aps Holding at 30 June 2012.

If the cash and stock tender offering is fully subscribed, the total number of new Hera shares issued for the merger and the cash and stock tender offering will be approximately 228.21 million, corresponding to approximately 16.99% of the post aggregation share capital, of which 10.67% is held by the Municipalities of Trieste and Padua, while the part paid in cash under the scope of the merger and the cash and stock tender offering will be equal to a maximum of €9 million, taking into account the net financial debt of Acegas Aps Holding equal to €6 million.

The project which will be approved by the B.o.D. is based on a positive assessment, in terms of the creation of value for shareholders, of an 8/11% increase in earnings per share (in the light of a share capital increase of 228.2 million shares reserved for the Acegas Aps aggregation transaction). In addition to this increase, made possible as a result of the expected synergy from the integration worth approximately €25-30 million per year, which can be achieved in the short to medium-term, is the management sustainability profile of Acegas Aps which is similar to the Hera Group.

The project will not change the Group’s current solid financial profile, measured in terms of net financial debt/EBITDA, and it will guarantee the financial flexibility needed for the “new” Group to continue its development.

This project reconfirms Hera’s central role in the consolidation process of multi-utility companies in a sector which is still extremely fragmented. The presence of a high number of medium/small businesses is the main reason that one of the most strategic and important industries for the country’s economy is lagging behind. Against this background, the transaction with Acegas Aps is unique in terms of pursuing concrete consolidation in the industry. The project also opens up new possibilities for Hera in other areas in this industry which is still fragmented in terms of competition in the Acegas Aps territories (there are a large number of small and medium-size multi-utility businesses in Veneto and Friuli Venezia Giulia).